Preview from Europe: Equities Drift Lower in a Quiet Market

It’s gone all eerily quiet in a fatigued and illiquid market as we approach year-end. The Dow Jones fell 1.12% last night in another low volume day. Stocks continue to fret in the wake of the Madoff debacle. Morgan Stanley (MS) missed their earnings expectations badly yesterday and General Electric (GE) has even given up giving earnings guidance.

Today’s Market Moving Stories

• Incoming US President Obama said he will nominate Daniel Tarullo to an open seat on the Federal Reserve Board.
• The UK Deputy Governor of the Bank of England said they may take rates all the way to zilch. He also mentions the new buzzword “quantitative easing” but says that this of course would have to be approved by the Treasury.
• The UK Chancellor is set to announce another multi-billion pound package next month, aimed at getting the banks to restart lending to businesses of all sizes. Past loan schemes along these lines have covered up to 80% of the risk on each loan. But this generates further risks to the taxpayer in the event that a worsening economic outlook leads to an increase in default rates and crystallises some of the Government’s contingent liabilities.
• ECB arch hawk Axel Weber said that rates may be allowed to dip below 2% (the historic post 9/11 low) as their forecasts for economic growth may be trimmed further. Their staff forecasts, though only three weeks old, look like fantasy island stuff.
• There is some talk that the ECB may announce a cut in the rate on interest that they pay banks who lodge monies with them. They want to encourage banks to lend and get that pesky V in the old MV = nominal GDP going again. So far everything else they’ve tried has merely resulted in more hoarding.
• Chrysler has announced that it is to shut all 30 of its plants from tomorrow for one month. The two desperados, General Motors (GM) and Chrysler, have restarted merger talks. One is reminded of the old adage that two wrongs don’t make a right. In related news President Bush (yes that cretin is sadly still in office) said that he’ll decide on emergency loans to automakers “relatively soon”! There’s no urgency of course.
• One can only surmise that the game is up for the majority of hedge funds and they will be faced with massive redemption calls at any given month end until they are more or less extinct in the form we knew them. This will lead to more seemingly illogical short selling.
• It's refreshing to see that falling demand of oil still trumps the OPEC cry babies. Despite cutting production by 2.2m barrels per day, US Crude fell by 8%! Yes despite the merchants of doom predicting that we were on the way back to a three figure handle per barrel, the price actually is hovering around $40 a barrel. Dire news for Putin and those simply insufferable Iranians but some Xmas cheer at the pumps for consumers and another disinflationary input.
• Ireland is back in focus due to the weakness of sterling which is putting huge stress on already hard pressed retailers as Xmas shoppers flock across the border.

Dollar Freefall
EURUSD’s uninterrupted climb back to 1.45 in jig time is just one example of the general inertia prevailing. The potential for a bit of a run on the US dollar is beginning to worry investors, particularly those overseas. A twin deficit of 10-12% of GDP historically has spelled curtains for any currency. That said, the reserve status of the dollar has been called into question before, only for it to rebound sharply.

There isn’t much “easy money to be made”. As correlations break down, sure bets like a “weak dollar = higher commodity prices” that had worked a treat thus far this year are now losers.

Data Today
The main focus of the European morning will be the key German IFO business survey sentiment at 09.00GMT. This is closely watched by even the ivory tower dwellers of the ECB and is on a 6 month losing streak. A further fall in the index to 84 is expected by the markets. A super weak number may put a January rate cut back on the table.

UK-wise, we have the random walk that is the retail sales number (i.e. it is very difficult to predict) at 09.30GMT with the street looking for a –0.6% read.

Stateside we have the weekly jobless claims (-558k expected) at 13.30GMT; leading indicators (-0.4%) at 15.00GMT; Philly Fed (-40.5) at 15.00GMT and the weekly natural gas inventories. The Fed’s Fisher will also give a speech.

Equities and Earnings

• Today sees earnings from FedEx (FDX), Pier 1 (PIR), Rite Aid (RAD), Oracle (ORCL), Palm (PALM) and Research In Motion (RIMM). For a daily list, check out the new Trader Report.
• Nike (NKE) beat expectations last night after the bell on strong overseas sales.
• Apple’s (AAPL) share price is under the kosh on renewed concerns about Steve Jobs's health.
• French supermarket giant Carrefour has put out a profit warning.
• Mining giant Rio Tinto (RTP) have had their credit rating cut by Moody’s due to the debt burden from their Alcan acquisition.
• Merger talks between BA (BAIRY.PK) and Aussie airline Qantas have been called off.

And Finally… Fred Thompson On The Bailouts
Remember irony is not something your mother used to do for you.

Disclosures = None